It is not the responsibility of the State to protect customer deposits

Without the protection of the State a bank with insufficient reserves would suffer a bank run, since the customers would demand their money back. If it doesn't matter to anyone that the bank has been profligate with deposits, due to the presence of deposit insurance, then there will be no fear of insolvency and the customers will not worry. Reserves, when there is fiat deposit insurance, then become irrelevant.

It is because reserves are irrelevant that the banks have been able to continually inflate the money supply, customers realise that narrow money (cash) is no more valuable than bank deposits, assuming the insurance can be trusted.

Customers and banks create new money when a deposit is made, at a bank, with deposit insurance the bank now has use of the money, no longer the customer, to make loans or investments which will influence prices just as before, and the customer has a new deposit. If the bank does not own the money held in its vaults, contrary to the situation presently, then it cannot make investments and the money will be removed from the economy, no longer influencing prices, (neither the bank, nor the person receiving the outside loan or investment is able to use the money to cancel and pay off debts) and subsequently there will be no inflation and no new money creation when deposits are made.

To prevent the ability of banking institutions to increase the money supply and cause inflation, either the protection for deposits can be removed, to allow bank runs, or it can be made illegal for the bank to invest and or loan deposits outside of the bank. In either scenario there remains the problem of how to treat the existing institutions which have very many more deposits than they are able to redeem.